Broadly syndicated bank loans might still be considered a niche investment by some, but the asset class, as measured by the Morningstar LSTA US Leveraged Loan Index, has nearly doubled over the past decade and is now larger than high-yield bonds. A new report from Morningstar Indexes examines the loan market from the perspectives of yield, credit risk, historical volatility, and return.
An Expanding Asset Class: Morningstar LSTA US Leveraged Loan Index Total Market Value
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According to the research, leveraged loans’ expansion predates its 2022 rise over the high-yield market, when its floating-rate nature provided a buffer from the pain of sharp rate hikes that also sent its yields soaring. The popularity of leveraged loans is owed, in part, to financing demand from private equity-backed borrowers and buying demand from collateralized loan obligations. Citing a study from Morningstar Manager Research, the strategic portfolio use case for leveraged loans is also examined.
Katie Binns, Director of Fixed Income & Multi-Asset Indexes, Morningstar:
“Leveraged loans can be used by investors in a short-term tactical manner or for long-term strategic allocations. Current yields remain attractive, and the asset class has become increasingly popular with a widening set of credit investors, including those waiting to make an allocation to private credit. While credit risk is a feature not a bug of the asset class, the Morningstar LSTA US Leveraged Loan Index has actually been less volatile than its high-yield bond counterpart. Ultimately, leveraged loans have many merits as part of a well-diversified portfolio.”
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